Citi Private Bank says market has priced-in Obama victory

John Woods, managing director and chief investment strategist, Citi Private Bank says the market has priced in an Obama victory at the moment. "To that extent I would be very surprised if we broke out of this sort of 100 point 5 percent range that we have had for the last 2 or 3 months," he told CNBC-TV18 in an interview.

Television networks projected that President Barack Obama won re-election as US president over Republican Mitt Romney in Tuesday's election despite a sluggish economy and high unemployment.

According to Woods, a Romney win would had come as a surprise for the financial markets. In that case the market could had seen a reasonably sharp, albeit temporary spike in equities led by financials and the opposite would happen. "You will probably see some dollar strengthening and yields remaining well supported at current levels," he believed.

However, earlier reports had suggested that Wall Street would like Mitt Romney as President, because it believes that his plan to cut taxes on capital gains and dividends, as well as for corporations, will do it good. Business leaders also feel that the US is more likely to avoid going over the fiscal cliff with a Romney presidency.

To be fair, Woods feels, both candidates have very limited ability to materially dodge the bullet. "Both have actually got a reasonably constraint set of tools to deal with it," he said. The market is probably taking the view that whoever wins over the next three-four months, the number one job is to try and prevent the economy falling off the fiscal cliff and do that to their best to their abilities.

The dollar is expected to strengthen and liquidity concerns are likely to arise. In that case, whatever liquidity is there will start to flow into developed markets, particularly the States rather than Asian markets. "Obviously, Asian markets benefit in the first month or so over surge of liquidity and I guess if Romney got in and given his very well known views towards quantitative easing you might see a drying up of those flows and a subsequent impact on risk markets here," Woods said.

Below is the edited transcript of the analysis on CNBC-TV18

Q: What is your sense? I know it is impossible to call the verdict, but which way is the market primed to receive it. Do you see a rally in either case or is the market tilted more towards one versus the other?

A: I think the market has probably priced-in, at current levels, a Obama victory. To that extent, I would be very surprised if it breaks out of this 100 point, 5-percent range that we have had for the last two or three months. As a consequence, my sense is that, given his slightly more positive view towards quantitative easing and Bernanke, there will probably be some weakening of the US dollar and probably a slight deterioration in term rates.

Conversely, if Romney was to win, I think that would actually be a surprise. I think there would probably be a reasonably sharp, albeit temporary, spike in equities led by financials and the opposite would happen- there would probably be some strengthening in the dollar and yields will remain well-supported at current levels.

Q: The next leader, whoever it is, will have to tackle that huge fiscal deficit. In your opinion, who has a more credible approach towards solving the fiscal cliff issue?

A: I think to be fair, both candidates have very limited ability to materially dodge the bullet. I think both have actually got a reasonably constrained set of tools to deal with it and to that extent again, I repeat, the market hasn’t traded out of this 100 point range for three months. It is probably taking the view that whoever wins over the next three-to-four months, the number one job is to try and prevent the economy falling off the fiscal cliff and do that to their best to their abilities.

I would add one warning to that, is that if we have a draw, if you recall back in 2000 the situation with Gore and Bush led to a paralysis of government for around a month whilst the deadlock headed to a constitutional litigation in the Supreme Court. That's precisely what we don’t want to happen at the moment.

I appreciate the polls are neck-and-neck and there doesn’t seem to be any one out in front at the moment but if we were to get to a dead-heart, a situation similar to that in 2000, that deadline will bring fiscal cliff ever closer and I would suspect that would have a very material and frankly, negative effect on risk markets.

Q: Do you see Asian markets reacting any differently? If the dollar strengthen as you suggested, and you see some concerns about liquidity do you think Asian markets might take a different view compared to what the US equities might do in the immediate aftermath?

A: Yes, I do. I think they would carry on as they have been doing for the last couple of years. In other words, we would see liquidity flowing into developed markets, particularly into the US rather than Asian markets. Obviously, Asian markets will benefit in the first month or so, of an over surge of liquidity.

I guess if Romney won and given his very well-known views towards quantitative easing, these flows might dry up and result in a subsequent impact on risk markets here. But to be fair that would just be an extension of what we have seen over the last couple of years.

Q: If Romney does come to power, it seems like Ben Bernanke’s tenure maybe short-lived. How will the markets react to the possibility of Romney perhaps appointing a more hawkish Fed chairman?

A: I think it is very, very unlikely that a chairman who will put up rates is going to be appointed as that would be suicidal in the first 100 days of office. So I cannot imagine any President seeking to appoint a chairman of the Fed with an avowed policy of jacking up rates in this very, very sensitive times.

Q: Do you think the markets might just shrug the US presidential polls off as a non-event which will lead to a 2-percent volatility, or do you see this altering the trend in the market into December?

A: That is the question everyone is asking. I think that once the election is over the market is essentially going to discount it as it did for the bond-buying programme by the ECB and the QE3 initiative by the US last month. I think the focus will then shift full-front to the fiscal cliff. I actually expect volatility in the market to actually accelerate into that event.

It is a very serious event. Some people are diminishing it- they are calling it the fiscal slope or the fiscal bump. I have heard it described or likened to the phantom risks associated with Y2K. We actually at Citi Private Bank treat it very seriously. It does have the potential to meaningfully impact growth in the United States and for that reason, we are not complacent at all.

We believe that the global overlay will probably deteriorate into this event and the markets will not be trading at the highs that they have been for the last two or three months. So we will remain and maintain our conservative asset allocation with a preference for overweight fixed income, particularly high-grade corporate credit and underweight subsequently, on equities.

Q: How do you expect commodities to move as we head into the fiscal cliff?

A: I think that all risk assets to be fair will be under pressure and I do not think oil or natural gas will escape that. It is interesting to note the inference or observation from various sources that improving data from China had allowed some commodity prices to turn firm in the last month or so.

I think China will remain the absolute and key price -setter for commodities. And if we continue to see stability or even an improvement in that country, then I guess one will offset the other, and we will probably see some rather uneasy stability in that space.